By Snell, Ron
State Legislatures , Vol. 36, No. 7
The battering state budgets have taken in the past few years has drawn more public attention to another huge financial issue: public pension systems.
There are 24 million active and retired members of state pension systems. When markets plunged two years ago, the assets in those systems were pummeled. Newspaper headlines since have raised alarms about the solvency of the systems and whether states are dealing with the issue adequately. State lawmakers have engaged in a flurry of activity in 2010 to address concerns in their public pension systems. No year in memory has seen as many significant retirement bills enacted as this year.
Colorado cut back previously promised post-retirement increases for people who have already retired. Illinois increased the normal retirement age to 67, probably a first for state plans. Utah completely redesigned its retirement plans. Virginia and Wyoming converted noncontributory plans to ones that require employee contributions.
Illinois Senator Donne Trotter says risk containment and balancing intergenerational costs were key to his state's 2010 revisions-the same impetus for reforms across the country.
"How do we protect the next generation? How do we balance costs between this generation and the next?" he asks.
By May, 11 states had enacted major changes to increase employee contributions, restrict or eliminate future cost-of-living adjustments, increase age and service requirements for retirement, cap benefits, and tighten rules for retired people who want to return to government work. They include Colorado, Illinois, Iowa, Michigan, Minnesota, Mississippi, New Mexico, Utah, Vermont, Virginia and Wyoming. Benefit increases have been almost nonexistent, though putting retirement systems on a more solid footing is a benefit for everyone.
States have not just now awakened to the problem. In fact, lawmakers have been aware of and studying it since the middle of the decade. In the last five years, many have increased employee contributions, lengthened how long employees need to work to receive benefits and changed cost-of-living increases.
RADICAL AND CONSERVATIVE
These changes can be seen as radical, or they can be seen as conservative.
For decades, states have made retirement plans more flexible and generous. Before 2000, legislatures regularly improved the benefit packages--reducing the time it took to earn a pension, increasing the amount of salary a pension would replace, protecting benefits against inflation, and easing the restrictions against retiring and coming back to work, often called double-dipping.
Reversing this trend is a radical change in direction. But that is exactly what states have been doing.
"We have to ensure we can meet 100 percent of the commitments we've made," says Utah Senator Daniel Liljenquist, explaining the reasoning behind the changes. "We have to remove the risk of bankrupting the state."
But the changes are also conservative. They preserve the structures of the past. Although half the states have made significant changes in retirement plans since 2005, only Alaska, Georgia, Michigan and Utah have changed the basic structure of statewide plans.
CHANGE IN PLANS
When the private sector began to abandon traditional, defined benefit plans for 401(k) plans in the early 1980s, state and local governments considered moving in the same direction.
A 401(k) plan is a defined contribution plan. It does not guarantee an annuity based on compensation and length of service, but instead allows participants to convert their account to an annuity at retirement. The amount of the annuity depends on the contributions employers and employees have made and how well the investments have done. It moves the risk from the employer, who bears it in defined benefit plans, to the employee.
Traditional benefit plans are too expensive, place too much burden on taxpayers, and lack the flexibility of 401(k) plans, say advocates of defined contribution plans. …